Will the renminbi ever really be a reserve currency?

Just over a year ago the renminbi passed a significant milestone when the IMF included it in its Special Drawing Rights currency basket, with the dollar, pound, euro and yen. But Jamil Anderlini, FT Asia editor, explains there are big obstacles to it becoming a true reserve currency.

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China's quest to internationalise the renminbi began in Hong Kong over a decade ago. But how close is the renminbi to becoming a true reserve currency, and one day even challenging the almighty US dollar? China reached a key milestone in 2016. The IMF decided to include the renminbi in its special drawing rights currency basket, alongside the dollar, pound, euro, and yen.

But that happened just as Beijing introduced new capital controls to stop money flowing out of the country, and arrest the slide in the renminbi's value. At the end of 2016, the renminbi was only the sixth most used currency in the world, behind even the Canadian dollar. China's own trade with the rest of the world is overwhelmingly settled in US dollars.

The biggest obstacle to the renminbi becoming a real reserve currency is the fact it is not freely convertible. On top of that, foreign investors are mostly excluded from China's financial markets. And these markets are subject to the whims and political imperatives of the ruling Communist party. So even if lots of people outside China did start accepting renminbi as payment, there is hardly any way for them to invest it. In short, the renminbi will never be a real reserve currency, no matter how big China's economy gets until the Communist party decides to lighten up and relinquish control to the market. And let's face it, that isn't about to happen any time soon.